PRINC OF ECONOMICS PKG >CUSTOM<
7th Edition
ISBN: 9781305018549
Author: Mankiw
Publisher: CENGAGE C
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Question
Chapter 34, Problem 1CQQ
To determine
Relation between money supply and aggregate demand .
Expert Solution & Answer
Answer to Problem 1CQQ
Option ‘b’ is correct.
Explanation of Solution
Option (b):
By the theory of liquidity preference, an increase in the money supply shifts the money supply curve to the right causing the equilibrium interest rate to decrease. This stimulates consumption and investment, thereby expanding aggregate demand. Thus, option ‘b’ is correct.
Option (a):
Increase in money supply shifts the money supply curve to the right, which lowers the interest rate. Thus, option ‘a’ is incorrect.
Option (c):
By the theory of liquidity preference, a decrease in money supply shifts the money supply curve to the left causing the equilibrium interest rate to increase. This reduces consumption and investment, thereby contracting aggregate demand. Thus, option ‘c’ is incorrect.
Option (d):
Decrease in money supply shifts the money supply curve to the left, which increases the interest rate. Thus, option ‘d’ is incorrect.
Economics Concept Introduction
Concept introduction:
Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period.
Money supply: Money supply refers to the total amount of monetary assets circulating in an economy during a particular period.
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Click on the link to study the Economics in the News. Then answer the following questions.
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3. Use the AS-AD model to show the changes in aggregate demand and aggregate supply that occurred in
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Price level (GDP deflator, 2009=100)
LAS 16
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$16.7
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16.6
16.7 16.8 16.9 17.0
SAS 16
= SAS17
AD 16
17.1
17.2
17.3
Real GDP (trillions of 2009 dollars)
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Price level (GDP deflator, 2009=100)
Fed Raises Rates As Job Gains, Firming Inflation Stoke Confidence
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When the Fed raises the interest rate,
A. aggregate demand decreases and short-run aggregate supply increases, and the price level falls
B. aggregate demand increases and real GDP increases
C. aggregate demand decreases and the price level falls
D. short-run aggregate supply increases and the price level falls
The graph shows the long-run aggregate supply curve and the short-run aggregate supply curve.
Draw the AD curve to illustrate the state of the economy…
Price level (GDP deflator, 2009=100)
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Source: Business Journal, May 25, 2016
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B. move to a full-employment equilibrium as short-run aggregate supply increases at the same time
'C. move to a full-employment equilibrium and equilibrium real GDP equals potential GDP
D. remain stuck in a below full-employment equilibrium
If the economy…
Chapter 34 Solutions
PRINC OF ECONOMICS PKG >CUSTOM<
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